The US bond market reaction may serve as a caution before tomorrow's Fed's statement. Thursday's SNB meeting should not bring any significant changes on the monetary policy. The EUR/PLN remains close to 4.20 level before the Fed's decision.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30: CPI inflation from the US (minus 0.1% m/m and +0.2% y/y; excluding gasoline and food +0.1% m/m and +1.9% y/y).
Discussions regarding Thursday's Fed's meeting hasn't stopped. Currently probability that the Fed keeps interest rates unchanged is much higher than the odds for a hike. The market, however, sent a surprising signal yesterday. Yields on 2-year bonds rose to 0.80% what is the highest level in 4 years.
Shortly after 16.00 CET the US equities began the rally. Better sentiment on capital market pushed the yields higher on US bond market. In normal economic environment it is a logic decision – higher stocks suggest better future economic conditions what should push the inflation higher and increase the odds for interest rate hikes.
But currently the environment is far from normal and keeping rates unchanged should not push the yields higher even though it is positive for stocks. As a result the spike in 2-year yields can be a result from two outcomes. It was either a market jitter on fairly low liquid market and an attempt to open positions on better levels or the market anticipates “no change hawkish meeting”.
Is it possible to keep the benchmark unchanged and still send a hawkish message? Yes, but several conditions have to be met. Firstly there need to be a strong evidence that the rate will be hiked later in the year. Secondly the macroeconomic projections should not deviate significantly from June's estimates. Thirdly during the conference Yellen should strongly focus on the positive developments of the US economy – unemployment slide, real estate rebound, consumer conditions improvements. Lastly the interest rate future path should not assume less than 100 bps hike/year in the following years.
What is also worth to note is that both higher stocks and yields strengthened the dollar around half percent. “Hawkish unchanged” is also dollar positive. As a result after yesterday's reaction it should be ruled out that after initial dollar slide market participants may shift their view to higher US currency.
The SNB decison
Not only the Fed's meeting is scheduled for tomorrow. The Swiss National Bank (SNB) is also expected to discuss the monetary policy during it regular meeting. No major changes are expected despite the fact that there are some speculations that the SNB might cut deposit rate from minus 0.75% to minus 1.25%.
However, the odds for such a move are fairly slim. Currently the Swiss franc is rather biased to the downside what is supported by loose monetary policy and interventions on the FX market. This slow depreciation trend on the CHF is positive message for the SNB. Thomas Jordan would like to see slower fundamental depreciation of the currency than volatile market. As a result the statement would be similar to the last one.
Firstly the CHF may be stronger on unfulfilled speculations regarding deposit rate hike. Overall there is no significant threat concerning further weakens of the Swiss franc to other currencies.
The foreign market in a few sentences
Trading on bonds and currencies yesterday can be a warning sign to see the Fed's decision as a one-way-bet. Even keeping the rates unchanged might be seen as a hawkish message. As a result the dollar may slump firstly and then rebound significantly on fairly solid economic projections and quite steep future rate path.
Stable zloty with the appreciation appetite
The zloty remains fairly close to the 4.20 level. Analysing scenarios on Federal Reserve meeting there is higher chance to see the EUR/PLN fall than its appreciation. If the Fed keeps rates unchanged and combines the decision with dovish statement than both EUR/PLN and USD/PLN should fall.
Also keeping the borrowing costs unchanged combined with slightly hawkish statement should also push the EUR/PLN lower. Only the hike with suggestions on more increase this year will be negative from the zloty. This scenario, however, is the least possible.
The EUR/PLN should remain fairly stable today around 4.20 level. Even if the equities markets rose again today there is a slim chance for significant appreciation of the zloty.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/USD rate: